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  • Emerging Markets Debt Daily

    Turkish Lira Hurt Despite Lower Inflation

    Natalia Gurushina ,Economist, Emerging Markets Fixed Income
    January 03, 2019

    China’s central bank (PBoC) is sticking to its “drip irrigation” policy approach. Lower inflation in Turkey is feeding into the market expectation of substantial policy easing in 2019.

    Turkey’s inflation continued to ease in December – a tad faster than expected – feeding into the market expectation of 783bps of policy rate cuts in the next 12 months. Headline inflation moderated to 20.3% year-on-year and core inflation to 19.53%, reflecting mostly lower fuel prices and tax cuts. The currency’s performance also helped at the margin. Weakening domestic demand should help to lower sequential inflation in the coming months, but the base effect is likely to keep headline inflation close to 20% early in the year. Add sticky expectations (16.46%) to this, and the only logical conclusion is that room for policy easing remains limited for now. The Turkish lira is trading very weak again this morning, despite the positive inflation surprise, as it got caught in the overnight currency flash crash.

    China’s central bank (PBoC) is sticking to its “drip irrigation” policy approach. Yesterday’s move involved widening the range of bank loans for small companies that qualify for lower reserve requirement ratios1. There are various estimates floating around in regards to the efficacy of such micro-moves. Some analysts believe that the latest initiative can inject up to CNY700B into the system, which may come in handy in the run up to the historical Chinese New Year liquidity squeeze.

    A strong ADP employment print in the U.S. (271K) looked out of place against the backdrop of a much weaker than expected Institute for Supply Management (ISM) survey. Pretty much all ISM sub-indices undershot consensus by a wide margin in December, with the new orders index collapsing to levels last seen in 2016 (see chart below). The weak ISM survey, which pushed the U.S. dollar down, supports an argument in favor of a rate pause made by Federal Reserve Bank of Dallas President Robert Kaplan in a Bloomberg interview this morning.


    Chart at a Glance

    Institute for Supply Management Manufacturing Report

    Source: Bloomberg LP


    PMI – Purchasing Managers’ Index: economic indicators derived from monthly surveys of private sector companies; ISM – Institute for Supply Management PMI: ISM releases an index based on more than 400 purchasing and supply managers surveys; both in the manufacturing and non-manufacturing industries; CPI – Consumer Price Index: an index of the variation in prices paid by typical consumers for retail goods and other items; PPI – Producer Price Index: a family of indexes that measures the average change in selling prices received by domestic producers of goods and services over time; PCE inflation – Personal Consumption Expenditures Price Index: one measure of U.S. inflation, tracking the change in prices of goods and services purchased by consumers throughout the economy; MSCI – Morgan Stanley Capital International: an American provider of equity, fixed income, hedge fund stock market indexes, and equity portfolio analysis tools; VIX – CBOE Volatility Index: an index created by the Chicago Board Options Exchange (CBOE), which shows the market's expectation of 30-day volatility. It is constructed using the implied volatilities on S&P 500 index options.; GBI-EM – JP Morgan’s Government Bond Index – Emerging Markets: comprehensive emerging market debt benchmarks that track local currency bonds issued by Emerging market governments.; EMBI – JP Morgan’s Emerging Market Bond Index: JP Morgan's index of dollar-denominated sovereign bonds issued by a selection of emerging market countries; EMBIG - JP Morgan’s Emerging Market Bond Index Global: tracks total returns for traded external debt instruments in emerging markets.

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